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Silicon Valley says Detroit must start over to survive

The Tata Nano could change the economics of the auto industry, one venture capitalist says.

SAN FRANCISCO (Reuters) -- For those who think billions of dollars in federal money has saved the American auto industry, Silicon Valley’s venture capitalists have a different view to share

The U.S. auto industry, they warn, can never become competitive again. It remains too wedded to a dying business model and too out of touch with the sources of innovation, they say.

Instead, they look for a new group of upstart companies to shoot to prominence and profitability, overtaking the automakers once known as the “Big 3" just as Google Inc. came from nowhere a decade ago to eclipse established technology companies.

"I do not believe that the U.S. auto business can be competitive," said Ray Lane, a managing partner at Kleiner, Perkins, Caufield & Byers. "I don't see any of these new car companies based in Detroit."

Lane is backing plug-in hybrid carmaker Fisker Automotive, which is planning to launch a $39,000 model. He’s also slated to be chairman at V-Vehicle Co., an auto company unveiled in June that plans to build “environmentally friendly” vehicles in Louisiana with backing from billionaire T. Boone Pickens.

Detroit has lost its entrepreneurial spirit, Lane said.

"For years they have been led by accountants and lawyers, not engineers and entrepreneurs," Lane said. "That's OK if the industry isn't changing."

‘Start over’

So what do Ford Motor Co., General Motors Co. and Chrysler Group need to do to regain marketplace dominance?

The U.S. auto industry has been hit hard by high fixed costs from health care obligations and 27-year sales lows in the past year. After demand did not reach 10 million units in the first half of the year, the cash-for-clunkers program brought July’s light-vehicle sales rate to 11.1 million units and August’s to 13.7 million. But 2009 sales remain down 28 percent.

GM and Chrysler have restructured in federally sponsored bankruptcies, receiving $60 billion in government funding. Even Ford, which has avoided federal emergency aid and bankruptcy, is counting on government support in the form of nearly $6 billion in low-cost U.S. loans to develop fuel-efficient vehicles.

Business model redesign

But the only way the Detroit 3 can succeed is by completely overhauling the business model, moving beyond just designing attractive cars, Silicon Valley venture capitalists say.

"There is room for business model innovation and technology innovation," said Vinod Khosla, managing general partner of Khosla Ventures.

Khosla said U.S. automakers need to embrace innovation at all levels. He pointed to Better Place, which is building charging infrastructure and battery-swapping stations for electric vehicles.

"Better Place is saying, ‘Don't let the consumer buy the batteries,’ " Khosla said. "That's a business model innovation."

"There's lots of such innovation possible," he said.

The Silicon Valley financiers have high stakes in the transportation sector and are looking to herald the next wave of innovation in cars.

Khosla, co-founder of computing company Sun Microsystems, is backing a number of biofuels makers, including Coskata.

His former firm, Kleiner Perkins, a prolific fund that backed now-household names such as Google and online retailer Amazon, has set its sights on the green technology sector with bets like Fisker and fuel-cell maker Bloom Energy.

Kleiner Perkins' Lane said the success of Google and Amazon stemmed more from their unique business models than their technology.

“It was nifty technology that Google had developed, but there were 10 others that had technology,” he said. "It was innovation in the business model that produced the value in Google.”

New names

Raj Atluru, managing director of another Silicon Valley venture capital fund, Draper Fisher Jurvetson, said big carmakers will continue to exist. But new names will herald change in the industry.

"Tata Nano is going to change the entire supply chain. They are changing the economics," Atluru said. "Chery has gone from a start-up automotive company to $6 billion in revenue."

Chery Automobile Co. is among the growing ranks of Chinese firms to have held talks with European or U.S. brands without making any commitments, while India's Tata Motors has made headlines with its $2,500 Nano small car.

Draper Fisher, which has brought industry-changing companies like Internet phone company Skype and e-mail firm Hotmail to the marketplace, is betting on low-cost Indian electric-car firm Reva.

Kleiner Perkins’ Lane said a number of changes in the auto industry, including efficiencies in power train and electrification, "will set us up for the next 50 to 100 years in a totally different industry than the one that was created in the last 100 years.”